Not naming a beneficiary to your qualified accounts (IRA, 401k, 403b, etc.) can generate a large tax bill for your heirs. Leaving the beneficiary designation blank or listing your estate as the beneficiary of your qualified accounts will accelerate the distribution of these accounts. Since these types of accounts are subject to income tax at the time of distribution, an accelerated distribution will result in an increase in taxes due.

If the beneficiary is a non person, the account must be distributed over 5 years and income taxes are due accordingly. If the beneficiary is a person, the account is distributed based on a formula associated with the person’s life expectancy thereby minimizing the required distribution as well as the income taxes.

As if the income tax burden were not enough motivation, the sunset provision of the EGTRRA will bring back the estate tax to more of the general population. Combining the potential income and estate taxes due can bring the effective tax rate to a whopping 70%.

The solution to this problem is not only simple, but it is also free. Consider naming a person as a beneficiary to your qualified accounts.